Source: Golden Ten Data
If Japanese investors begin to withdraw from overseas markets, this could have a serious impact on bond markets such as the US, Europe, and Australia.
Japanese Prime Minister Fumio Kishida and Bank of Japan Governor Ueda Kazuo met last week, and not long ago, at the end of March, they had just held talks. This unusually short time interval prompted the market to bet that the Bank of Japan would soon raise interest rates and reduce purchases of Japanese bonds to curb the continued weakening of the yen. Ueda also seems to have adjusted the tone of his remarks about the exchange rate after the recent meeting.
As analysts predict that BOJ policymakers may take some action as early as the next meeting in June, traders expect Japan's benchmark 10-year Treasury yield to break through 1%. Despite this, this level is still below the current 10-year Treasury yield for almost all other major economies.
However, in Japan, this interest rate has not touched 1% since May 2013, when former Bank of Japan Governor Haruhiko Kuroda began implementing aggressive quantitative easing policies. Japan's benchmark 10-year Treasury yield rose 4 basis points to 0.915% on Thursday after a summary of the Bank of Japan's April policy meeting suggested that committee members were closely watching the impact of a weak yen on inflation and saw the possibility of a faster rate hike.
Tatsuki Nagano, president of All Japan Asset Management, said, “Domestic long-term bond yields may exceed 1% as early as this summer.” The company is funded by several local banks in Japan. He expects the Bank of Japan to reduce sovereign debt purchases in June and raise interest rates in July.
The Bank of Japan's historic exit from negative interest rates and asset purchases will also mean a drastic change in the behavior of Japanese investors, who may find the rise in Japanese treasury yields attractive. If Japanese investors begin to withdraw from overseas markets, this could have a serious impact on bond markets such as the US, Europe, and Australia.
In his speech on May 8, Ueda said that reducing bond purchases is already on the Bank of Japan's schedule. “Although the Bank of Japan is currently operating roughly on the scale of previous debt purchases in accordance with the March decision, it is appropriate to reduce the amount of treasury bonds purchased with the withdrawal of large-scale monetary easing,” he said.
Naka Matsuzawa, chief strategist at Nomura Securities, said that when the yield on 10-year Japanese treasury bonds rises to 1%, banks will start entering the market; when the yield on 30-year treasury bonds exceeds 2%, life insurance companies' investment in treasury bonds will actually begin. Since Japan began aggressive monetary easing in 2013, Japanese banks and insurance companies have been building portfolios centered on foreign bonds, but Naka Matsuzawa believes “capital will return to Japanese bonds.”
The Bank of Japan is facing greater pressure to tighten monetary policy to prevent further depreciation of the yen.
In his speech, Ueda said, “Sudden and weak one-sided fluctuations in the yen have increased uncertainty and had a negative impact on the Japanese economy.” He said that if foreign exchange trends affect the price trend in Japan, the Bank of Japan will naturally consider taking action.
Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management, said it is quite likely that the Bank of Japan will cut treasury bond purchases at the June meeting. Although this is not his main prediction scenario, “it is predictable that Japan's 10-year treasury bond yield will reach 1% if the purchase cut is immediately followed by an interest rate hike, and the Federal Reserve's interest rate cut is still far away.”